Housing affordability has been big talk in the country for a few years now. We’ve had rising interest rates and rising house prices, to a point where government felt it had to intervene to mitigate any negative impacts on household debt. To guard against that, and to perhaps force house prices to come down, the mortgage stress test was introduced, whereby borrowers needed to qualify at a higher rate than the actual contact rate.
Conventional wisdom is that falling prices should improve housing affordability but the stress test resulted in a percentage of the population, mostly first-time home buyers, getting priced out of the market.
Over the past six months we have heard anecdotal evidence that the situation is improving, and now we have some hard numbers that explains why. National Bank’s latest study of 10 major Canadian housing markets found that income growth was the reason, and that it had outpaced home prices -- and it looks as if that trend will continue. Rising incomes along with lower home prices, and relatively low interest rates, are a good start on the road to affordability.
National Bank measures affordability by looking at how much household income is spent on mortgage payments. Experts suggest that households should spend no more than a third of their income on housing costs. In the first quarter of 2019, the amount needed to pay mortgage payments on a average Canadian home was lower than the last quarter in 2018.
This is the case even in Vancouver, in both condo and non-condo markets. For example, in the condo market, a typical Vancouver household in the first quarter of 2019 the income needed to service a mortgage was down half a percentage point, quarter-over-quarter. And, it’s the first improvement in 15 quarters in the condo market. The improvement was even better for a house at 2.5% lower.
In Toronto that measure dropped a full percentage point but consumers still need a substantial chunk of their income to cover housing costs on an average Toronto home. However, more buyers are looking outside these larger areas where homes are more affordable. These include Calgary, Edmonton, Saskatoon, Regina Winnipeg, Saint John, Halifax and St John’s.
The National Bank’s two economists, Matthieu Arseneau and Kyle Dams, were quoted as saying, "…mortgage rates were not a drag on affordability for the first time in seven quarters.” They remain confident that more relief is on the way.
Even the Bank of Canada expressed growing confidence that the country’s economy is rebounding. Interest rates remained unchanged for a fifth straight time and said recent data has "reinforced” their view a slowdown at the end of 2018 and early 2019 was temporary.
However, we’re still not out of the woods yet --there remains the issue of the stress test. There has been a concerted effort among lenders and the real estate and mortgage broker channels to lobby government to consider making changes. The mortgage brokers channel’s association, Mortgage Professionals Canada, (MPC) has been campaigning aggressively to modify the mortgage stress test.
Many economists have added their voices to the campaign against the current stress test, pointing to the negative impact it’s had and/or will have on the housing market and on the economy – reduced housing activity can have long term impacts.
One of the core issues in their arguments is that the government didn’t take into account rising incomes. MPC chief economist Will Dunning makes a good case in his recent report titled, "The False Binary” that to take into account the future growth of borrowers’ incomes, the stress tests should be set at 0.75 percentage points above the actual contracted interest rates – they are currently at a minimum 2 percentage points above contracted rate.
The economy may be gaining strength; incomes are rising and affordability is easing in many areas. What home buyers and the housing market needs now is a little help from government. No one is advocating to remove the stress test, but perhaps they might consider lowering it.